"Over and over again they have told me compliance has a backlog and there is no-one I can talk to and no-one I can email," she says. "I had payroll due on Monday, I have staff I couldn't pay because we have no cash left and I had to pay it out of my own pocket."

McLister is not alone in her complaints about PayPal withholding money from small businesses with MySmallBusiness aware of dozens of cases of the payments provider freezing accounts.

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PayPal has been accused of dragging its feet in disputes with small businesses. Credit:iStock

Entwined in 'the biggest mess'

Until her account was frozen, McLister was a satisfied PayPal user using it as a payment provider on its website and as a merchant gateway for One Sonny Day's 50 wholesalers and stockists around Australia.

One Sonny Day had processed $115,000 through PayPal over two years with PayPal taking a 2 per cent cut of sales without any problems.

However things started to unravel when PayPal requested a compliance review in August.

One Sonny Day is operated through two trusts and McLister uploaded the documents requested in the review however they failed to upload correctly and PayPal limited One Sonny Day's account.

Karryn Dargie and Dean Baird are the owners of Tasmanian design and architecture studio Interia.

"That meant I could still receive money but not withdraw," says McLister. "Then it turned into the biggest mess, they kept requesting additional information from trust deeds to drivers licence to bank statements."

Each time McLister provided the requested documents and then another few weeks would pass before PayPal requested more documents while money accumulated in One Sonny Day's frozen account.

One Sonny Day is in dispute with PayPal.

"Two months later I still can't access the $6000 I have in my account and it is killing my small business," says McLister. "I call regularly but no one cares. They actually said to me 'You should have budgeted better'. It has just been so frustrating. We have no working capital available."

McLister received what she says is a 'standard response email' from PayPal which states: "We aim to resolve all complaints as soon as possible. However, depending on the complexity of the issue it can take up to 45 days."

PayPal has dragged its feet through this whole process.

Karryn Dargie

McLister filed a complaint last week with the Financial Ombudsman Service in a bid to get her money back.

'We won't take this lying down'

Karryn Dargie is another small business owner in dispute with PayPal.

She is the co-owner of architecture and design practice Interia which turns over $250,000 a year.

Dargie sold a custom made door handle to a customer for $3500 but after the customer mistakenly blocked the PayPal payment the money was automatically refunded to the customer and withdrawn from Interia's account and appears to be held by Westpac.

"We had all the communication, the delivery and postage tracking," Dargie says. "We submitted it and thought everything would be sorted out. Lo and behold that was six months ago and we are still no closer to getting our money back."

PayPal placed Interia's account in the red and so any money paid by other customers to Interia absorbed that debt.

As Dargie's products are custom made she has extensive communications with her customers which she says many businesses wouldn't have.

"PayPal has dragged its feet through this whole process," she says. "As a small business I wouldn't normally have contact with my customer or my customers bank. But because I do I can see that there has been an administrative error by Westpac but I have no right to chase Westpac so I have to wait until PayPal decides out of the goodness of its heart to chase Westpac on my behalf."

Dargie has also complained to the Financial Ombudsman Service.

"We thought, excuse my French but f--k this, we won't take this lying down," she says. "I don't accept it as an administrative process fault. I suspect we are not the only people, but we have a much clearer link to our customer than most people have so we can see what has happened."

Swift resolutions

Neil Slonim of the Bank Doctor, says small businesses need to be wary.

"I wouldn't assume PayPal and other payment gateways are going to assume a quicker and smoother processing of cash," he says. "As much as you might dislike the banks they have been around a while and they do things pretty well, theres no guarantee newer players will do it better."

A spokesperson for PayPal said the payments processor could not comment on individual cases.

"PayPal is committed to working with its customers to resolve situations in a swift manner," the spokesperson said. "While situations can vary, and some cases can be more complex than others, PayPal aims to work closely with its customers, communicate effectively, and resolve issues as soon as possible. Our goal is to make it simpler and safer for people to spend, save, manage and move money with PayPal, and we aim to address any issues in a timely manner for all involved."

After MySmallBusiness contacted PayPal for comment, it contacted One Sonny Day and Interia said it would refund the money owing.